As we embark on a brave new year in 2024 there are a multitude of considerations in both the economy and investment landscape. Coming off the heels of a late year rally in equities, we will see some familiar names continue their upward ascent while others fall behind. 2023 was the year of Artificial Intelligence and those companies who were affiliated with the new technology garnered much of the market’s attention. All the while, the Federal Reserve and interest rates found themselves in direct competition with A.I. for the media’s attention. We believe this narrative will continue for some time as we unknowingly wait for the next latest and greatest technology that will somehow radically improve our lives, or at least lead us to believe that. In the meantime, there are some things to consider.
2024 will be a year dominated by the headlines as we navigate white-knuckled from one potential catastrophe to the next. While this may sound dramatic, it is the most basic form of what financial markets do, climb a wall of worry, and then they do what we least expect. When we look out at our globally connected marketplace, it is easy to rattle off a laundry list of all the things that could go awry, and that list unfortunately is not getting any smaller. While it is easy to get caught up in all the negative things that MAY happen, we would like to first focus on some of the potential positives that lie ahead. After all, I am a budding optimist.
Much of the impending financial news will pertain to interest rates, the housing market, consumer spending, and of course unemployment. While all of these seem as though they are unrelated, they are very much the driving forces of our economy and the cost of capital. Looking ahead we see several pockets of attractive valuations and one of those places is in the bond market. With the dramatic increase in interest rates over the last 2 years, the yield here is as attractive as it has been in the last decade. While higher rates for longer is an ideal scenario for those low-risk investors looking to generate consistent cash flow, there may also be greater upside potential here as well. If the Federal Reserve decides to cut rates, bonds will appreciate and gain in value. This however can be something of a double-edged sword as rates go down, so the yield goes on any newly issued bonds. Depending on your situation, this may be a good opportunity to be an owner of bonds prior to the potential rate cuts that are likely to happen in 2024. It is also important to note that if the Fed is reducing rates, it means that inflation is coming down but also that the economy is beginning to soften. This is where consumer spending comes into play and will dictate not only inflation but how long rates stay elevated. Not to mention that if spending declines too far, rising unemployment will not be far behind. So, when the term “soft landing” is thrown around the news this is what they are referring to and a “Goldilocks” scenario is necessary to avoid a large-scale recession. After all, nobody wants to eat cold porridge.
Another segment of opportunity will be in the equity space. Much of last year’s returns were secular in the mega-cap growth stocks, particularly the “Magnificent 7.” This valuation expansion did not trickle down to everyone else. All those second derivative A.I. companies were left out of the rally right along with several other sectors like financials, utilities, and healthcare. Purely from a valuation standpoint, we believe these industries are worth a look. This would also be inclusive of small cap companies as well but with elevated risks as the smaller the company the greater the sensitivity to the underlying economic fundamentals. So, we see opportunities in size, style, and exposure, with some of that being outside of the U.S. Ultimately targeted exposure will be important but as always, diversification will be paramount.
Now I would be remiss if we did not also mention the fact that 2024 will be a hotly contested presidential election that will most likely drive some volatility along the way. What is of importance is that historically there have been 24 presidential elections since the start of the S&P 500. During that time, 20 of those years the index had a positive return, with an average return of 11%.1 So, as we know history does not repeat itself, the long-term averages are on our side. As the candidate field narrows, we will see more about potential policy, tax code, and legislation that will ultimately have a larger lasting impact on the world’s largest economy.
In summation, I am always reminded of the Chinese proverb, “May you live in interesting times” and to be candid for everyone who does not have a financial plan for their retirement, it is going to be especially interesting. For those that do have a plan, opportunity awaits in everyone else’s uncertainty.
1 This does not include the 2020 election results however Morningstar indicates that the S&P returned 16.26%. 2020 would be the 24th election and the 20th positive return for the index.
https://advisor.morganstanley.com/the-ernie-garcia-group/documents/field/e/er/ernie-garcia-group/S%26P%20500%20in%20Presidential%20Election%20years.pdf
This piece is for informational purposes only and is not a solicitation to buy or sell any of the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual's situation.
Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor. Investing involves risk, including the potential loss of principal. 2219579- 2/24.
I am always reminded of the Chinese proverb, “May you live in interesting times” and to be candid for everyone who does not have a financial plan for their retirement, it is going to be especially interesting. For those that do have a plan, opportunity awaits in everyone else’s uncertainty.
